According to CME Group’s FedWatch tool, expectations of an interest rate cut as soon as July rose to 55.4% from 26.5% a week earlier. Aggravating trade disputes, global recession fears and bouts of weak data triggered speculation of rate cuts.
Trade tensions between the United States and China escalated last month when Trump more than doubled down tariffs from 10% to 25% on $200 billion of Chinese goods and threatened additional 25% duties on further $325 billion goods. China retaliated with as much as 25% tariff on $60 billion worth of U.S. imports effective Jun 1. Trump also threatened to blacklist Chinese firm Huawei Technologies, forbidding it from doing business with American companies. China might hit back by restricting rare-earth exports to the United States.
Additionally, the Trump administration threatened to slap tariffs on all goods coming from Mexico in a bid to curb illegal immigration. Washington will impose a 5% tariff from Jun 10 that will increase to 10% on Jul 1 if illegal immigration across the southern border is not stopped. Levies will then rise by 5% each month up to 25% by Oct 1. The tariff will permanently remain at the 25% level unless and until the crisis stops (read: Profit From Trump’s Anti-Trade Policies With Inverse ETFs).
Weak Global Trends
Apart from tariff threats, factory activity contracted in Europe and Asia last month due to deepening trade dispute between the Washington and Beijing raising fears of a global economic downturn. The weak data has compelled central banks across the globe to roll out more stimulus. Australia’s central bank recently slashed benchmark rates to a record low of 1.25%. Last month, New Zealand’s central bank cut its benchmark interest rate for the first time in two-and-a-half years. India also cut interest rates for the third time today. Many other countries are also expected to cut rates in the coming weeks or months.
Further, the World Bank this week slashed its global growth outlook from 2.9% projected in January to 2.6% — the slowest growth in three years — citing trade conflicts, financial strains and unexpectedly sharp slowdowns in wealthier countries (read: Trade War Leading to Global Recession? ETFs in Focus).
The bond market is signaling the imminent recession. This is because yields on 10-year U.S. Treasuries have fallen below that of yields on three-month and the spread is the widest since 2007. This inversion of the yield curve underscores that investors would pay less for short-term bonds than long-term ones.
U.S. Economy Easing
The latest round of domestic economic data suggests that economic growth in cooling in recent months. The private sector added fewest jobs in May since 2010. The ISM’s manufacturing PMI fell to the lowest level since 2016 while IHS Markit US manufacturing PMI fared even worse, declining to levels not seen for a decade (read: US Manufacturing PMI Data Highly Disappointing: ETFs in Focus).
Against such backdrop, some ETFs are expected to soar higher if the Fed cuts rate anytime soon. Let’s have a look at them:
SPDR Gold Trust ETF GLD
Gold, which has gained momentum lately on safe haven demand, will continue to shine as lower interest rates would increase the metal’s attractiveness. The product tracking this bullion like GLD will see smooth trading. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It is the ultra-popular gold ETF with AUM of $32.3 billion and average daily volume of around 7.8 million shares a day. Expense ratio comes in at 0.40%. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 4 Reasons to Go for Gold ETFs).
Global X SuperDividend U.S. ETF DIV
The falling rates will lead to investors’ drive for higher yields, thereby raising the appeal for dividend investing. This fund provides exposure to the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $466.8 million in its asset base while trades in a good volume of about 122,000 shares. The ETF charges 45 bps in fees per year from investors. Holding 53 securities in its basket, the product is widely diversified across each component as each of these make up for less than 2.6% of assets. The product has a high annual dividend yield of 7.37% and has a Zacks ETF Rank #3 with a Medium risk outlook (read: 5 Dividend ETFs for Safety and Higher Yields).
Utilities Select Sector SPDR XLU
The instability in the financial markets coupled with the prospect of rates cut will continue to drive the utility sector. With AUM of $9 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. The fund is heavily concentrated on the top firm while other firms hold no more than 7.9% share. Electric utilities takes the top spot in terms of sectors at 60.1%, closely followed by multi utilities (33.2%). The product charges 13 bps in annual fees and sees heavy volume of around 18.1 million shares on average. It has a Zacks ETF Rank #3 with a Medium risk outlook.
iShares MSCI Emerging Markets ETF EEM
Emerging market stocks will get a boost, as a rate cuts in the United States would inject more capital into these nations. The ultra-popular ETF – EEM – tracks the MSCI Emerging Markets Index and holds 1,030 securities with none accounting for more than 4.51% of assets. However, the product is tilted toward financial sector at 25.3% while information technology, consumer discretionary and communications round off the next three spots. Among the emerging countries, China takes the top spot at 30.8% while South Korea and Taiwan also receive double-digit exposure each. The fund has AUM of $31.1 billion and average daily volume of about 77.9 million shares. It charges 67 bps in annual fees and has a Zacks ETF Rank #4 (Sell) with a Medium risk outlook.
iShares U.S. Home Construction ETF ITB
Decline in interest rates will bolster strong optimism into the homebuilder space, which is rallying on a decline in mortgage rates and slower home price growth that have made housing more affordable. ITB provides a pure play to home construction stocks by tracking the Dow Jones U.S. Select Home Construction Index. It holds a basket of 46 stocks with double-digit allocation going to the top three firms and other accounts for no more than 7.6% of assets. Homebuilding takes the top spot at 67.8%, followed by 12.6% in building products and 9.2% in home improvement retail. The product has amassed $2 billion in its asset base and trades in heavy volume of around 2.7 million shares a day on average. It charges 43 bps in annual fees and has a Zacks ETF Rank #4 with a High risk outlook (read: Best and Worst ETFs Halfway Through Q2).
The iShares U.S. Home Construction ETF (ITB) was trading at $38.17 per share on Thursday afternoon, down $0.04 (-0.10%). Year-to-date, ITB has declined -12.59%, versus a 6.81% rise in the benchmark S&P 500 index during the same period.
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